Gold Sheds War Premium, But Uncertainty May See Price Soar Again

The gold price flirted with its all-time high following the recent geopolitical tensions, before retreating below the $2,000 per ounce mark. Bullion analyst Sanjiv Arole reads the tea leaves to decipher which way the yellow metal could be headed next.

‘The Boy Who Cried Wolf’ is one of the better known stories of Aesop’s Fables. The shepherd boy who repeatedly cried ‘Wolf!’ to ease his boredom, having fun at expense of the villagers who rushed to his rescue, found out the hard way when a wolf actually came and no one responded to his alarm. Gold can now add its own version of ‘The Boy Who Cried Wolf’ in reverse. For almost the entire year, gold analysts, gold bugs, experts, analysts, chartists et al predicted a higher price for the yellow metal in 2021. Many predicted $2500-3000 per ounce to be range that the gold price could reach. LBMA gold analysts forecast an average of $1,973.8 per ounce for 2021. In reality, gold ended the year 2021 at $1,805.85 per ounce with an average gold price of $1,798.6 per ounce. It made a mockery of the price predictions made by all the analysts, etc.

Ultimately, for gold, when the wolf finally made an appearance in the form of Vladamir Putin’s invasion of Ukraine on 24th February, 2022, all hell broke loose! The yellow metal which began the year at $1,809.05 per ounce made steady progress despite a couple of dips below the $1,800 per ounce mark. It was poised at $1,826 per ounce on the 11th February. Thereafter, as the winds of war began to blow it was poised just below the $1,900 per ounce mark. Then, as Russia invaded Ukraine with all its might on the 24th of February, the yellow metal rose sharply to $1,968 per ounce (am fix) on the same day. Then, after a dive to below $1,900 per ounce on the second day of the war, it rose by leaps and bounds over the next few days to scale $2,039 per ounce on the 8th of March (London pm fix). In fact, gold actually came within a whisker of crossing its all-time high of $2075 per ounce of August 6th 2020 (intra-day). The yellow metal just fell short of that mark as it fleetingly touched the $2,071 per ounce mark on 8th March 2022 (intra-day).

As it neared its peak level, gold took in its stride all the negatives for gold. However, when it became apparent that instead of a T-20 match, it looked more like a timeless test match, the gold price retreated back to below the $2,000 per ounce mark. And when it became evident that neither Russia nor US-led NATO were willing to risk a WWIII, gold gradually slipped to below $1.950 per ounce levels. It even slipped below the $1,900 per ounce level (intra-day) before recovering again. Gold even discounted for the Fed rate hike of 0.25% and ended at $1,935.80 per ounce on 18th March after dipping below $1,915 per ounce levels a day earlier.

It was not only gold, but the entire precious metals basket that reached higher levels after Russia invaded Ukraine. Gold rose from $1,809.05 per ounce at the start of 2022 to its peak for the year $2,071 per ounce on March 8, 2022 (up by over 14%). Silver too surged by over 14% to scale $26.17 per ounce at its peak for the year. The PGM group metals fared even better as platinum climbed by over 18% at $1,151 per ounce and palladium sky rocketed by over 61% to scale $3057 per ounce. Not only that oil rose to over $150 a barrel and the stock markets crashed spectacularly all over the global. The BSE, NSE as well as the Dow Jones fell sharply as war broke out. However, on March 18, 2022, gold shed half its gains due to the advent of war to be at $1935.80 per ounce. Silver too closed at $25.24 per ounce on 18th March, 2022, up by 10% from the start of the year as against over 14% at the start of the war.

The PGMs too shed their gains, while platinum gains were reduced to 6%; palladium too lost more than 50% of its earlier gains. Oil too fell sharply as it was poised to go below $100 a barrel. The stock markets on the other hand gained some of their lost ground. It would seem that the war premium had vanished just as suddenly as it had appeared at the advent of the war.

Once bitten twice shy is a very well known adage. Scalded by their ‘way off the mark’ precious metals predictions in 2021, LBMA analysts were ultra-cautious with their price prediction for all the precious metals. While the predicted average gold price in the LBMA annual price forecast at $1,801.9 per ounce for 2022 was just 0.2% above the average price forecast for 2021, it was in negative territory for the rest of the precious metals. Silver was slated to be down -6.4% at $23.54 per ounce, platinum down by -2.5% at $1063.4 per ounce and palladium set to decline -18% to $1967.8 per ounce. So much so, that even the war premium-shorn prices of the precious metals on 18th March, 2022 were comfortably above the price predicted by analysts in the LBMA Survey in three of the four precious metals, barring platinum. However, the solace is that the highest price predicted by the same analysts for the precious metals was way above the current levels. So, what will be in store for the precious metals, gold in particular, in the remainder of the year? What will be the main drivers of the gold price?

Geopolitical tensions would continue to disrupt the global economy. The continuation of Russia-Ukraine conflict that threatens to spread in the region could severely upset global markets and impacted the economies across the world. Even a financially maimed Russia would not bode well for the health of global economy. Rising energy costs could fuel inflation across the globe and impact productivity in energy deficient economies. The US continues to be the bulwark in the global economic scenario. US inflation at 7.5% is at its highest level since 1982. It could severely hurt the economy, impair unfettered hike in interest rates and corrode the value of the US dollar. The Fed, after tapering off QE has embarked on hike in interest rates. The first hike of 0.25% was made just in the week gone by with five more slated for the year. The target set by the fed to reduce balance sheet could be difficult as an aggressive hike in interest rates could hamper the ability to service the mounting US debt. The fear of stagflation and recession looming on the horizon too is for real.

Neither Russia nor US-led NATO could afford a long war over Ukraine. Economic consequences could be disastrous for the world at large. With the 4th wave of Covid-19 on the rampage across Asia and Europe, it would seem that the pandemic is far from over. Although, the impact could be lesser than the previous waves, it would be the proverbial Sword of Damocles hanging over the world. All of the above could be positive for the gold price. Demand could be seen from ETFs and central banks buying gold. Jewellery demand from countries like India and China could be hit if the gold price soars again towards its all-time high levels or scale the highs predicted by some analysts. Although markets (both commodity and equity) discount for the worst, gold price prediction could be a tricky affair for the rest of 2022. Some forecasters, chartists, analysts still predict gold above $2,200 per ounce and well above. However, there are those who warn that war premium (of around $150 per ounce) would soon dissipate once ceasefire is announced and peace returns. They predict gold to go even below $1,750 per ounce or lower. Gold is in for uncertain times again. As a result, it could still soar in 2022!

Meanwhile, closer home, the gold reforms juggernaut is gathering speed in India. Hallmarking has more or less been accepted by everyone concerned. However, while hallmarking centres want hallmarking to be made mandatory all over the country, retailers want the infrastructure to be in place before it is made compulsory throughout the country. As only 256-odd districts are under the mandatory hallmarking system, the hallmarking centres have their incomes only at few centres while the rest face survival issues due to skewed incomes. The retailers are apprehensive about the burden of responsibility regarding jewellery pieces as per the hallmarking marks resting mainly on them. Then, the recent Comprehensive Economic Partnership Agreement (CEPA) with UAE has cast apprehension in the minds of a few in the gold industry. The zero import duty on gold imports from Dubai could cause a surge in such imports (around 200 tonnes) and disrupt the domestic gold market. They remind one of the disruption caused when gold imports surged from South Korea (just 60 tonnes) after a similar trade deal. Then, the domestic market went into deep discount as compared to the international price. Moreover, domestic gold refiners too are likely to be hit as the CEPA could impact flow of dore as well as make refining of dore unviable.

The India International Bullion Exchange (IIBX), a consortium of the three premier exchanges in the country, at GIFT City is likely to become operational soon. Mock trading is said to be going on and the membership drive in full swing. However, if India aspires to become a gold hub as well as an international finance centre, then, it is imperative that import duties and tariffs are in tune with global trends. Moreover, both import duty as well as GST should be such that there are no compliance issues, even agree to suggestions made by the trade. Then, even the trade would not grudge if the erring players face harsh action. As a precursor, import duty and GST would require a downward revision. Recently, an MoU was signed for the Domestic Spot Gold Exchange by IBJA and NSE. Members of IBJA would have a 49% stake while remaining 51% would be owned by institutions (banks, finance institutions as well other exchanges). Then, the government is having a relook at the GMS to find out if the expenses on the scheme are more than the returns. Thus, look at course correction if required.

Finally, with many predicting India’s CAD to be around 10-year highs in the coming year, will the authorities continue its pro-gold policies? Or will they revert back to the old ways and pin the blame on gold imports? In the past, particularly after the sub-prime crisis of 2008 pushed the gold prices to the then all-time high of $1926 per ounce in September 2011, the knee-jerk reaction was to hike the import duty from around 1% to 10% in a very short span of time. Will history repeat itself and we see a rise in the import duty on gold? Or will better sense prevail? For, at stake would be the success of the newly formed (and not yet running) India International Bullion Exchange at GIFT City and the dream of making India a Gold Hub!

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